MBA Program

Course: Advanced Project Analysis and

Management (MBA 714)
Cr.Hrs: 2
Di-Africs Campus
1
Advanced Project Analysis and
Management (MBA 714)
Lecture Note
Prepared By
Sintayehu Aynalem (BA, MA, PhD)
Researcher, Journal Editor, and Consultant
Email: [email protected]
Mobile:+251-920273425 2
 Course Description
 Understanding of the theory and practice
of project analysis and management.
 Practical aspects of project identification
and appraisal.
 The course provides an in-depth study of
project evaluation techniques.

3
 Course Objectives/learning
outcomes
After completing this course, the
students should be able to:
• Understand project analysis and
management framework
• Learn how to evaluate and prioritize
potential projects
• Develop project planning skills
• Develop project management skills

4
Course Contents

Chapter 1: Introduction to Project

Analysis and Management
• Concepts, scope, definition of project
• Characteristics of projects
• Classification of projects
• Project Vs Program
• An overview of project cycle
5
Course Contents…Con’d
Chapter 2: Project Identification (Idea Generation)
• Generation of ideas
• Problem analysis
• Carryout needs assessment/problem or opportunity analysis
• Expected change/outcomes
• What is the need for the project
• How and when the project to run?
• Sources of finance
• And who to involve?
• Preliminary analysis and screening of project ideas
• Criteria and project rating matrix
• Analyzing barriers of entry

6
 Course Contents…Con’d

Chapter 3: Project preparation and Analysis

• Market and Demand Analysis
• Situational analysis and specification of objectives
• Collection of information
• Characteristics of the market
• Market planning
• Technical Analysis
• Institutional and social analysis
• Environmental Analysis

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Course Contents…Con’d

Chapter 4: Financial analysis

and projection
• Cost of project
• Means of finance (project financing)
• Estimation of sales and production
• The cost of production
• Cash flows in financial analysis
8
Course Contents…Con’d

Chapter 5: Project Appraisal (The project

Selection Criteria)
• Non-discounting Methods
• Ranking by inspection
• The payback period
• Proceeds per unit of outlay
• Discounting methods of project selection
• The Net present Value (NPV)
• The internal rate of return of a project (IRR)
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 Mode of Assessment

In-plant study report and presentation 40%

Article review 10%

Final Exam 50%

Total Marks 100%

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Open Session-Discussion

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Introduction to a Project

A project is a temporary venture/endeavor to

produce a unique product, services, or results.
• It has a clear beginning and end and takes place over
a specified time period.
• It also has a well-defined scope and resources.
• A project is unique- it is not part of routine operation
• A specific set of tasks designed to accomplish a
specified goals and outcomes.
• Has specified clients or stakeholders.

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Con’d…
• A successful project is one that meets at
least four criteria:
• Schedule,
• Budget,
• Performance, and
• Customer satisfaction.
• Successful projects are delivered on time,
on budget and perform as expected by
conforming to design specifications, and
satisfy customers.

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Basic components of a project
Product/services

Schedule Resources

Involving the right people in your project

14
 Project Success Vs The Triple
Constraints
The Triple Constraints
What level of quality must
the deliverables have?

Resource, budget Features and functionality

There is trade off in the

three constraints to
deliver project objectives

A project manager should never,

Schedule never, ever trade off quality during
project implementation 15
What is project management

It is the application of knowledge,

skills, tools , and techniques to
project activities to meet project
requirements, needs, and objectives.
Key features include:
• Identifying what is needed or to be achieved
(requirements)
• Addressing needs, concerns, and expectations
• Balancing competing constraints [scope, quality, schedule,
budget, resources, and risks] 16
 Project management is the process of
guiding a project from its beginning
through its performance to its closure.

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PM…Con’d

Effective management of project is becoming

more critical to the competitive position
of organization and societies.
Planning;
PM is the
discipline Organizing;
of
Securing; and

Managing resources to achieve project goals.

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 Features of a Project ... Con’d

Unique Outcome:
The product or service is different in some
distinguishing way from all other products or services
within an organization.
Resources: A project utilizes a variety of resources
[human, financial, material, information, etc.] to carry
out the activities or tasks.

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 Project features…Con’d
Scope- the extent of the problem or
opportunity that the project needs to address.
Organization: is vital to coordinate resources
to achieve the project objectives- organizations
can be public, private or NGOs.
Time: any project should be time bounded-it
has a start and end time. There will be a
beginning and an end, with a number of distinct
phases in between.

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 Project features...Con’d

oCost: activities consume (i.e., human, financial

and material resources).
Quality: the project needs to produce quality
products/services to maximize the satisfaction of
the users.
Introduce change: A project is often used
as an instrument for change - change for the
betterment of the society.

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 What is project quality?

• Quality is one of the key

component of successful
project

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Project Quality…Con’d

Quality:
• Fitness for purpose (fitness for use).
• Meeting or exceeding customer expectations
• Satisfying the right needs at the right time in the
right ways

Successful
project
Customer
satisfaction
Quality
project
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 Project Quality…Con’d
Project Quality components:
• Customer quality – does the project give
customers what they want (as measured by
outcomes for service users – e.g. satisfaction
surveys etc.
• Professional quality – does the project
accomplished as per procedures and standards?
• Process quality – do the design and operation
of the project process right? And use resources
in the most efficient way to meet customer
requirements?
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Generally projects used to:
• Support country's policy objectives
• Support the national strategies
• Addresses relevant problems recipients
• Have feasible, achievable objectives
• Benefits are likely to be sustainable.

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Challenges

• Unique, something new, no blueprint

• Sometimes difficult to define –what is
Why are it, when does it end.
projects • Working with people.
challenging? • Too much to do, too little time.
• As soon as you start, something
changes

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 Common Challenges…Con’d
The 15 common challenges for Project based on the views of
project stakeholders

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Why Do projects GO Wrong?
/10 Poor communication
/10 Mismanagement of resources and time scheduling
/10 Weak definition of requirement and inadequate planning
/10 Poor risk management

/10 Use of new technology/methods

/10 Supply chain failures

/10 Poor quality control

/10 Scope creep

/10 Monotasking Vs Multitasking

/10 Lack of suitable resources
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Quality of Good Project Manager

Communication

Flexibility

Organized

Time, Resources, budget management skills

_?
_?
_? 29
 Project Classification
Economy
Project Shares in the

• More than 20% of the global

economic activity takes place as
project (e.g., Developing countries- it
approaches 40%
• Projects exist in every sphere of
business, markets, and industry.

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 Project Classification

• Project involves in a myriad of types, costs,

sizes, and complexity:
• Small initiatives, e.g., weddings, parties,
fundraising
• Medium-size initiatives, e.g., advertising
campaigns, capital acquisitions, business re-
engineering, restructuring, information systems
• Mega-projects: such as NASA space station,
hydro-electric dams and military campaigns,
GERD
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 Ownership
Size
joint- cooperative,
Private Public
venture NGOs)
Small-scale
Large Medium
projects
Short-term
On the basis of project
time Long-term Grassroots
project /Local
Good producing
projects, e.g., sugar Regional
factory project

Services providing Scope

projects, e.g.,
Product types telecommunication National
projects

Knowledge,
research, International
consulting projects. 32
 Classification of project . . . Cont’d
With examples
Project Categories: Examples
Each having similar life cycle
phases and a unique project
management process
1. Aerospace/Defense Projects
1.1 .Space Satellite development/launch
1.2. Military operations Task force invasion
2. Business & Organization Change
Projects Acquire and integrate competing company.
2.1. Acquisition/Merger Form and launch new company.
2.2. New business venture Consolidate divisions and downsize
2.3. Organization re-structuring company.

3. Event Projects
3.1 International events 2018 World Cup Match
3.2 National events

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 Classification of project . . . . . . Cont’d
Project Categories: Examples
Each having similar life cycle phases and a unique
project management process

4. International Development projects

4.1 Agriculture/rural development People and process intensive projects
4.2 Education in developing countries funded by The
4.3 Health World Bank, regional development banks,
4.4 Nutrition USAID, other UN, and government
4.5 Population agencies.
4.6 Small-scale enterprise
4.7 Travel and Tourism
4.8 Event and Hospitality

5. Product and Service Development Projects

5.1 Information technology hardware New desk-top computer.
5.2 Industrial product/process New earth-moving machine.
5.3 Consumer product/process New automobile, new food product.
5.4 Pharmaceutical product/process New cholesterol-lowering drug.
5.5 Service (financial, other) New life insurance.

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 Classification of project . . . . Cont’d
With examples:

Project Categories: Examples

Each having similar life cycle
phases and a unique project
management process

6. Research and Development Projects

6.1. Environmental Measure changes in the ozone layer.
6.2. Industrial How to reduce pollutant emission.
6.3. Economic development Determine best crop for sub-Sahara
6.4. Medical Africa.
6.5. Scientific Test new treatment for breast cancer.
Determine the possibility of life on Mars.

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 Project Vs program
• “Project” – a series of activities to produce a Project
Purpose in a fixed time frame/
A “Program” – a series of projects whose objectives
together contribute to a common Overall Objective, at
sector, country or even multi-country level.
• A program is an assortment of related/associated
projects that are managed together to achieve a
number of objectives.
• Programs may also contain elements of ongoing
operations.
• Since programs comprise multiple projects, they are
larger in scope than a single project.
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Policies, programmes and projects

National & sector wise policies

Government
programmes Priorities and
programmes of non-
state actors

Project-1 Project-2 Project

Fig. 2 : The relationship between polices, programmes, and projects 37

 Project Program
Narrow in scope Wide in scope; can
comprise many projects as
components.
Specific and detail Comprehensive and
general
Differences

More precise and accurate Broader goal related to

in its objectives and sectoral policy
features
Possible to calculate the Difficult to calculate costs
costs and returns and returns
Similarities

• Have purpose/ objectives

• Require input (financial, manpower, material)
• Generate output (goods and/or services)
• Operate over space and time 38
Examples
• Water sector programs:
• Water supply & Sanitation program
• Small scale and medium scale Irrigation
Projects
• Hydroelectric Development programs
• Project: Dam Construction (Great Renascence Dam
project)

39
 Projects Vs operations
Organizations perform two types of work:
Project work and
Operational work
• Operations are ongoing and repetitive while
projects are temporary and unique.
• The purpose of a project is to attain its
objective and then terminate whereas the
objective of an ongoing operation is to
sustain the business.
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Feature Projects Operations
Purpose Attain objectives and Sustain the
terminate organization
Time Temporary Ongoing
Unique product, service, or Non-unique product,
Key Differences

Outcome result service, or result

Dynamic, temporary teams Functional teams
formed to meet project generally aligned
People
needs with organizational
Generally not aligned with structure
organizational structure
Varies by organizational Generally formal,
Authority structure direct line of
of
Manager
Generally minimal, if any, authority
direct line authority
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An overview of Project Life
Cycle

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 Project Life Cycle: An overview
 Project life cycle is the stages through which the
project passes from inception to its completion.
Is a continuous process made up of
• Separate stages each with its own characteristics,
and
• Complementary stages (phases) and each setting
a ground for the next one.
The cycle is generally divided in 5 phases:
Identification, Preparation and Appraisal, Project
Planning, Implementation, and Evaluation and audit.

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Starting the Project
Organizing and preparing
Carrying out the work
Closing the Project
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 • Clarifying the business need, defining high-
Initiating processes: level expectations and resource budgets, and
beginning to identify audiences
• Detailing the project scope, time frames, resources,
and risks, as well as intended approaches to project
Planning processes: communications, quality, and management of
external purchases of goods and services
• Establishing and managing the project team,
Executing processes: communicating with and managing project
audiences, and implementing the project plans
• Tracking performance and taking actions
Monitoring and necessary to help ensure project plans are
controlling processes: successfully implemented and the desired
results are achieved

Closing processes: • Ending all project activity

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 Monitoring and controlling processes
Planning processes

Initiating Closing
The five processes processes
project-
process
Executing processes

Support the
four project Starting the Organizing Carrying out Closing out
life cycle project and the work the project
stages. preparing

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Project life cycle management

47
Successfully performing these processes
requires the following:

Information Accurate, timely, and complete data for the

planning, performance monitoring, and final
assessment of the project.

Communication Clear, open, and timely sharing of

information with appropriate individuals and
groups throughout the project’s duration

Commitment Team members’ personal promises to

produce the agreed-upon results on time
and within budget. 48
The project cycle
Programming
1.Identification
(Project Idea
generation)

5. Evaluation 2. Preparation
& closure & Appraisal

Proposal
Appraisal development

4. Implementation Financial Analysis

and projection
3. Project
planning

49
 World Bank Project cycle
• World Bank guideline reveals the following five major
steps/stages in the project life cycle.
1) Project identification (conception)
2) Project preparation (feasibility studies)
3) Project appraisal and investment decision (project analysis)
4) Project implementation, supervision and follow up
5) Project evaluation

50
 United Nation Industrial Development Organization’
Project Life Cycle
• According to UNIDO, a project’s cycle can be divided
into the following phases:
1. Pre-Investment Phase
a) Project Identification (Opportunity Study)
b) Pre-Selection (Pre-feasibility Study)
c) Preparation (Feasibility Study)
d) Appraisal (Appraisal Report)
2. Investment Phase (Implementation)
3. Closing Phase

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 Project Life Cycle ...........

The Follows the life of a project from the initial idea

through to its completion.
Project
Cycle:
Provides a structure to ensure that stakeholders
are consulted.

Defines key decisions, information requirements

and responsibilities at each phase.

52
 1. Project Identification
• Project conception stage.
• Potential project ideas to address public infrastructure
needs/problems/demands
1. Project identification…Con’d
Potential projects emanates from initiatives by specialists, local
leaders and national development strategies.

Stakeholders analysis, particularly primary stakeholders.

Problem analysis identification and setting objectives

Assess alternative strategies for meeting objective.

54
 Pre-Feasibility Study
• To roughly check whether the project is
technically or economically feasible

• The idea behind the rough check is to quickly

filter out those projects in order to save the costs
which will occur in a more expensive feasibility
study
Feasibility study

Situational Analysis: Scan the entire env’ts

• To analyze whether the concept project is feasible or not
considering analysis on following aspects:
• Demand and market analysis
• Technical analysis
• Financial Analysis
• Economic Analysis
• Social Analysis
• Environmental and Sustainability Analysis
• Gender and social Analysis etc.

56
 Appraisal/Approval
• Re-examining all aspects of project by donor,
financial institutions, planning agencies
• If the project is worth undertaking, investment
decision is made
• The study can be supplemented with further
studies
• Project investment decision is made.
• Project is approved.
3. Project Planning
• The project solution is further developed in as much as detail as
possible.

4. Implementation and monitoring

• The project plan is implemented over a specified time period.
• Monitoring of project performance with a management
information system to enable correction of implementation
problems as they arise.

5. Evaluation & closure

• On-going and final assessment of the success of the project
against original objectives, to learn lessons to help improve
future projects.

58
 Question
What is the difference between
monitoring and evaluation in project
management?

59
Monitoring and Evaluation
• Monitoring:
Concerned with verifying that project
activities are being undertaken, services
are being delivered, and the project is
leading to the desired behavior changes
described in the project proposal.

60
 M&E…Con’d
• Evaluation:
• Most evaluations will consider one or more of the
following criteria
oRelevance:- Did the project address the needs of
community members?
oEfficiency:- Did the project do so in a manner that
was as low-cost as possible?
oEffectiveness – Did the project change existing
practices in a beneficial manner?
oImpact – What was the effect of those changes?
oSustainability – Are the changes sustainable?
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End of Chapter-1

62
Article Review-1

63
 Chapter -2
Project Identification
(Generation, Screening of Project Idea, and
Identification stage)

64
 Introduction

It is the initial stage of a project but most important step in the
process of project preparation.
1st stage to identify good investment opportunities which are
feasible and promising.
Good project ideas are the key to success
It starts from idea production/generation
Identification of promising investment opportunities requires
imagination, sensitivity to environmental changes, and a
realistic assessment of what the firm can do.

65
Stages of Project Identification
1. Conceptual stage: generating ideas from every
sources
2. Screening stage: the process of eliminating
unimportant/less feasible/project ideas
3. Identification Stage
4. Feasibility Stage: investment opportunity study

66
 Project identification…Con’d
• Technically, Project identification involves:
• Stakeholders analysis
• Problem analysis
• Setting of objectives
• Analysis of alternatives
• Therefore; the critical elements for project
idea are
• Resources
• Opportunities
• Constraints
67
 Stakeholder Analysis
Interest and
Participation in Engagement in Possible role in
Stakeholder attitude towards project
preparation project evaluation
group the project implementation
Direct

Government
(e.g., energy
minister….)

Community

NGO (e.g., Farm

Africa

Indirect

Private sectors

68
 Problem Analysis
• A helpful tool for
systematically understanding
the causes of a problem is the
problem tree method.
• The problem tree method
involves the identification of a
core problem which is based
on the best understanding and
sources of information
available, and identify the root
causes and effects of the
problem. Objectives

69
Problem Tree and Objective Tree

Negative statements Positive statements

Sources: USAID, 2020

70
Example: Problem Tree

Effect

Causes

71
Example: Objective Tree
Tourism
restored Reduce demand on Productivity restored
d healthservices

Decreasemorbidity
d and mortality

Eliminate outbreak
of cholera in
Kingstown

Sanitary conditions
improved
Potabl
e water
supplied
in target (c)
areas

Pit latrines Flood control Mainteance of Health

improved measures nwatermains education in
implemented improved target
Sewer
maintenan
ce
communities
(d)
improve
d

72
Sources of project idea identification

Generate many ideas as possible

• Technical specialists/experts
• Local, regional or national government organizations (e.g.. investment
authority)
• Review or post-evaluation of past projects/lesson learned
• Plans of different parties (state, corporate)
• Development banks
• Entrepreneurs and
• People with bright idea
• Employees
• Customers
• Competitors

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Sources of Project identification

• Micro-level
• Performance of industries
• Input-output analysis for various
industries
• Import/export market trend
Sources of • Local materials inputs
Idea • Economic and social changes
• Emerging technological trends
• Unfulfilled needs
• Attending trade fairs
• Macro-level
• Policies, plans, and strategies

74
 Sources of Project Ideas…Con’d
• In practice, project ideas often result from the
identification of:
• In line within, a country’s poverty reduction strategy
and/or sector-wide approach
• Problems or constraints in the development process
• Unused or underused material or human resources and
opportunities
• Conversely, overused natural resources that need to be
conserved or restored
• Unsatisfied demands or needs
• The need to complement other investments

75
 Sources of Project Idea…Con’d
• Project needs for:
• As a response to long-term trends such as
migration, environmental degradation, and
climate change
• A desire to create a permanent local capability to
carry out development activities by building up
local institutions
• As a response to the occurrence of natural events
(drought, floods, earthquakes) and the short-term
responses to crisis

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 Project idea sources extraction
methods
Focus
Interview Roundtable
group

Workshop Forum

77
Screening of project Ideas: What are
the factors?

Project Rating Index can be

screen the best suit project Idea.
Including:
• Profitability/feasibility
Process of selecting the best • Resource-ability/availability of resources
project Idea from a pool of ideas • Acceptable Risk level
• Reasonability of costs
• Compatibility with the sponsor
• Consistency with government
focus/priorities
• Adequate market demand
• Cost-Benefit Analysis
• SWOT Analysis

78
Reasonableness of Costs
Cost of material inputs
Labor cost
Factory overhead costs
General administration costs
Selling and distribution cost
Service Cost
Economies of scale
79
Adequacy of market demand

Total present domestic market

Total present international market
Competitors and their marketing share
Sales and distribution system
Consumption pattern
Barriers to the entry of new projects
Economic, social, and demographic trends
80
Acceptability risk level
• Vulnerability
• Technological change
• Competition from substitutes
• Competition from import
• government control over price and distribution
• Shifts in consumer preferences

81
 SWOT Analysis
• It is important for identification of projects for existing
company/business/organization
What are elements in the SWOT Analysis
1. Availability of internal financial resources
2. Capability of raising external financial resources
3. Availability of production facilities
4. Technological capabilities
5. Availability of different sources of raw materials
6. Availability of infrastructure facilities
7. Cost structure and profit margin
82
SWOT Analysis
8. Distribution network of the company
9. Market share of the company
10. Capability of the top management
11. State of industrial relationship
12. Impact of corporate laws
13. Likely change in gov’t policies
14. Possibilities of evolving new technologies
15. Change in the customer preferences
83
Identification of Development Projects
• Often initiated by
• Government
• NGOs
• Approach
• Top-down approach: project can be identified based on the demand
beyond the community.
By
• International convention
• International institution
• National Organization/Policy priority
• Bottom-UP-Approach: project beneficiaries are sources of the new
project identification
• Household survey
• Rapid Appraisal/ Rapid Rural Appraisal/Rapid Urban Appraisal/
• Need Assessment survey

84
Project Identification

• Specific
Smartness • Measurable
of Project • Achievable
Idea • Realistic
• Time bounded

85
 Techniques Involved in Identifying a Project

• There are four main elements when analyzing a

problem. These are:
1. Stakeholder Analysis including:
 preliminary institutional capacity assessment, gender analysis
and needs of vulnerable groups.
2. Problem Analysis:
 Profile of the main problems including cause and effect
relationships)
3. Analysing of Objectives:
• Image of an improved situation in the future
4. Analysis of different Strategies:
• Comparison of different options to address a given situation
86
 The problem Statement
• The process of project identification ends with the
formulation of a problem statement.
• Steps involves in the formulation of problem
1. Listing all the problems/needs
2. Prioritizing the problems and selecting core/major
problems in line with “ limited means, unlimited ends”
3. Finding out the root causes of the problem
4. Sitting the likely effects of the problems on the
community/business/or organization
5. Suggesting the problem solution
6. Identifying the projects from the solution

87
 Roles and Responsibilities in Project
1. The Sponsor is the owner of the Project or any party who
provides funds to the project.
2. A Project Manager is responsible for meeting the client's
requirements such that the project's outputs are fit for purpose
and are delivered within the agreed timeframe and cost.
3. A Business Analyst is the conduit between those requesting
the outputs of a project (the project sponsor and clients) and
those who are required to create the outputs (the project
team).
4. A Business Expert provides business expertise, the business
rules and guidance on how the business operates to the
project. 88
Project Identification
Idea

Project

89
 Project
identification

Pre-
feasibility
study

No Reject
Feasibility

Yes Detailed
feasibility
study
Market feasibility
Feasibility
Technical feasibility analysis

Financial feasibility
Profitability
Economic feasibility

Legal feasibility Appraisal

Environmental feasibility
Preparation

90
91
 Tip:1

Project Proposal
Writing

92
 • Defining a Vision
• A vision is an agreed long term projection of what
the organization will be ideally in some years' time.

Organization ’s Long-term Strategic Future

Vision Strategy Objectives Planning

Objective 1 Project 1
Objective 2 Project 2
Objective 3 Project 3
93
Project Proposal

Desired Current
situation Gap situation

Need

Project

94
Definition of Project Proposal
• A project proposal is a detailed description of a
series of activities aimed at solving a certain
problem.
• Project proposal writing is converting the plan into
a project document.
• Project design is a result of both project planning
and the project proposal.
• Both steps are essential to forming a solid project
design.

95
Background of the Project

Rationality/Justification of the project;

Stakeholders of the Project

Target beneficiaries of the Project

Activities and implementation timeline;

Methodology ; and human, material and financial resources requirements

96
• Executive Summary
• include a summary of everything you wish to say in
your proposal.
• Objectives of the project,
• who it aims to help,
• Where it will take place and
• Why it is needed.
• Give a basic timeline and say how much this project
will cost.
97
• Opening section of the project document.
• Present the general and sectoral context within
which problems exist that the project will be
addressing.
• Provide background information leads to the issue
of the project.
• Identify national developmental and sectoral
priorities
• As well as their relationship to the project goals
and the MDGs, as relevant for the project.
98
99
Problems/Issues to be addressed
First, clearly define the problem/s that the proposed
project will address. Next,
• Describe the scope, history and causes of the problem/s;
step taken so far to address the issue
• Identify the gap/s (existing problem/s) and justify how it
will be addressed in the project.
• Then after,
• Explain how the problem/s relates to overall sector
development with reference to government development
priorities i.e., it has to be very specific to the sector`s
issues and priorities.

100
1. Identify the stakeholders (agencies, organizations,
groups or individuals) which have a director/indirect
interest in the project.
Primarily stakeholders and their roles
Secondary stakeholders and their roles
2. Identify the target beneficiaries (groups or
individuals) for whom the project is being undertaken.
Direct beneficiaries: the groups which would be directly
positively affected by the project.
Indirect beneficiaries: are those who would benefit from the
project at the long-run.

101
• In the project development process, formulators
carefully develop both goal and immediate objectives
which should be:
• SMART
• Specific
• Measurable
• Achievable,
• Relevant and
• Time-bound.
• Goal and objectives should directly address the
problem mentioned in the Problem Statement.
102
Project Goal and Objectives
• A project goal is a very general, high-level and
long-term objective of the project.
• Project objectives provide a more detailed
breakdown of the project goal.
• A project will likely have multiple objectives, but
usually there is one project goal.
• It should ideally support the overall policy of the
country or the Organization.

103
 Hierarchy of Goal, Objectives, Results and Activities

Project Goal Problem

Objective 1 Objective 2

Result 1 Result 2 Result 3

Activity 1 Activity 2 Activity 3 Activity 4

104
 Project Implementation and Management
Plan

• The outline of how the objectives of the project

would be achieved.
• Set and define the strategies and the activities to be
implemented in the project.
• Describe how each immediate project objective will
be carried out in terms of planned activities, their
timing and duration, and who
(individual/institutions) will be responsible for each
activity.
• Example format

105
• Describe list of all project activities, timeframe,
responsible body and its role.
• Work plan be prepared in consultation with other
stakeholders.
• Activities are usually listed out in a Gantt Chart.
• A Gantt Chart is a kind of a time table of all project
activities given along with the role and
responsibilities of the project staff.
• Example Format
No Activities Expected time in Days/Months/Years Responsibilitie Remark
s
106
 Project Implementation Management
Strategy

Implementation strategies
• Every project needs a clear strategy and a well planned
methodology to successfully achieve its outcome in a
timely and efficient manner. Therefore, it should
• Explain clearly how the project will be implemented in the
field;
• Define what methodology will be used to ensure
stakeholder participation and ownership;
• Describe who will be responsible for planning and
management of project operations as well as the roles of
other bodies and organizations associated with the project

107
 Project Implementation Management
Strategy

Sustainability
• Discuss the continuity of the project, once the current
phase of project is completed.
• Plans for introducing self-financing provisions to ensure
continued viability of operations on project completion.
• What resources, infrastructure, capacity, processes etc. are
in place to ensure continuity.
• How and why the outcome of this project will be
sustainable
• What partnerships are to be established that can contribute
to the sustainability of project activities and outputs.
• Lessons learned by the project or knowledge generated.
108
 Risks and Assumptions

Identify the risks which could jeopardize the

realization of the project outcome

Describe how the project will mitigate these

perceived risks.
NO. Risks Impacts Probability Mitigation Remark

109
The results are generally positive experiences
undergone by the beneficiaries.

Results Outputs: Outputs are immediate results that we achieve

soon after the completion the project.
are Outcomes: Outcome is the result of outputs which are the
divided result of activities.
into three
types: Impact: The impact is the longer-term result that has
happened because of the activities

110
 Project Monitoring and Evaluation

• It is the responsibility of the funding organization to

carry out monitoring and evaluation of the project
• Discuss what proposed mechanisms and procedures
for monitoring of project operations to ensure that
activities are implemented as planned.

111
 Project Monitoring and Evaluation

Project Monitoring Project Evaluation

• To measure the success of a project
• it is necessary to carry out an
Monitoring is an evaluation.
internal mechanism • By considering the
• project objectives, results, positive and
to monitor the results, negative impacts, it will be possible to
identify the success, shortcomings and
risks, assumptions specifically lessons learnt. in the proposal.
• All projects need to be evaluated five
and performance times a year, four during the submission
of the progress report and the other is on
regularly through completion of the project phase.
meetings and • Identify the party who will responsible
for this task as well as how intended
submission reports. beneficiaries will be involved.

112
• A budget is defined as patterns of expenditure and
revenue over the life of the project
• Realistic planning of finances is key to the
implementation of a project or program.
• Generally, the budget has mainly two functions.
1. it estimates, as realistically as possible, the cost of
completing the objectives identified in the project
proposal.
2. It provides a means to monitor the project's financial
activities over the life of the project.
113
It is important that the budget is realistic.
Before preparing a budget, determine what would be an
appropriate amount to request.
The numbers should be specific.
Your planning should allow for contingencies.
Some donors require that some part of the cost of a project be
borne by the applicant institution.

114
Typical categories may be, for example:

● Personnel Costs (salaries, fees, peridiem, wage, etc.)

● Travel costs
● Vehicles/transportation costs
● Equipment/Raw Materials
● Consumables and supplies
● Sub-contracts

115
 TITLE
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A PROJECT PROPOSAL

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Submitted by
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NAME OF PROJECT OWNER/S
Cover Page

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Submitted to
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Name of Theme Office
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Month & Year
Place, Country
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Thank You

117
 Chapter -3
Project Preparation
and Anlysis

118
Overview

• At the very first stage of undertaking an

investment option an organization needs to
consider:
Whether some project idea will work or not?

119
Overview…
Feasibility Study
Situational analysis
and specification of
Objectives
Collection of

Institutional and social

secondary information
Market and Demand

Technical Analysis

Financial Analysis
Conduct market survey
Characterization of
Analysis

analysis
Market
Demand forecasting
Market Planning

120
Overview

121
 What is Feasibility Study?

• It looks at the viability of a project idea with an

emphasis on identifying potential problems.
• A project feasibility study examines all of a
project’s aspect such as economic, technical,
legal, and scheduling issues to determine the
possibility of the project’s successful completion.

122
 Feasibility study…Con’d
• Before you begin writing your project plan:

• You need to identify how, where, and to whom

you intend to implement your project
• Assess your competition/capacity
• How much money you need to implement your
project?

123
Why feasibility Study is so important?

• Possible Reasons to undertake FS

• It address where and how the project will

operate.
• The study provides a in-depth details about the
project to determine if and how it can succeed,
and
• Serve as a valuable tool for developing a
winning project plan.

124
 Reasons for undertaking PFS
• In modern times, project operations are complex
which requiring carefully prepared plans.
• Helps the promoter to make the investment
decisions correctly and to obtain funds without
many difficulties.
• Provides valuable information for “go/no go”
decision.
• Increases probability of project success by
identifying weaknesses early.

125
 Feasibility study….Con’d
o Additionally, feasibility study helps to:

o List in detail all the things you need to make the

project work;
o Identify logistical and other business-related
problems and solutions;
o Develop marketing strategies to convince a bank
or investor that your project is worth considering as
an investment and
o Serve as a solid foundation for developing your
Project plan.

126
Benefits of Feasibility Study
Improves project
teams’ focus

Aids decision-
Identifies new
making on the
opportunities
project

Enhances the
Provides valuable
success rate by
information for a
evaluating
“go/no-go”
multiple
decision
parameters

Identifies a valid
Narrows the
reason to undertake
business alternatives
the project
127
 The components of a feasibility
study
• Description of the Project:
o The product or services to be offered and how they will be delivered.
• Market Feasibility: includes
• a description of the industry,
• Current market,
• Anticipated future market potential
• Competition, sales projections, potential buyers, etc.
• Technical Feasibility:
• Details how you will deliver a product or service (i.e., materials,
labor, transportation, where your project will be located, technology
needed, etc.).
• Required resources
• Risk: what are the risks involved in completing the project?
• Operational feasibility: whether and to what extent the
project can meet the organization’s needs?
128
Components…Con’d
• Financial Feasibility: does the project has budget?
• Projects how much start-up capital is needed,
• Cost of project and profitability estimates
• Sources of capital,
• Returns on investment, etc.
• Cost-benefit analysis
• Organizational and Managerial Feasibility:
• Defines the legal and corporate structure of the project
• Legality: what is the project’s legal environment?
• Human Resources:
• Required knowledge, skills, commitment,
• Responsibilities and duties
• Employee incentives and facilities
• Schedule feasibility: 129
 Elements of feasibility study report
There are basically six parts to any
effective Feasibility Study
 The Project Scope: define the business problem
and/or opportunity to be addressed.
 The Current Analysis: define and understand the
current method of implementation, such as a
system, a product, etc.
 Requirements: provide details about how the
requirements are defined depends on the object
of the project's objectives.
 The Approach: describes the recommended
solution or course of action to satisfy the
requirements. 130
Elements of feasibility study report
• Evaluation: examines the cost effectiveness of the
approach selected.
• Analysis of the estimated total cost of the project
• Estimation of labour and other expenses
• A project scheduling showing the project path and start-and-
end dates.
• Results/re-evaluation: a formal review is conducted
with all parties involved. The review serves two
purposes:
• To substantiate the thoroughness and accuracy of the
Feasibility Study,
• To make a project decision; either approve it, reject it, or ask
that it be revised before making a final decision.

131
Market and Demand
Analysis

132
Introduction

• In most case, analysis of market and

demand is the first step in project
analysis.
1. Estimate the potential size of the market
for the product proposed to be
manufactured (or service planned to be
offered)
2. Know the current market share.

133
Con’d…
Market and demand analysis is
concerned with two broad issues:
1. What is the likely aggregate demand
for the product/service?
2. What share of the market will the
proposed project enjoy?

134
Con’d

• M&D analysis is very important, and yet

difficult questions in project analysis.
• Intelligent and meaningful answers to them
call for an in-depth study and assessment of
various factors like
• Patterns of consumption growth/consumer
demand
• Income and price elasticity of demand,
• Composition of market,
135
Con’d…
• Nature of competition,
• Availability of substitutes,
• Reach of distribution channels,

136
 Steps in M&D Analysis
• There are six key steps involved in market
and demand analysis.
1. Situational analysis and specification of
objectives
2. Collection of secondary information;
3. Conduct of market survey;
4. Characterization of the market;
5. Demand forecasting;
6. Market planning.

137
138
 Con’d…

• 1. Situational Analysis and Specification of

Objectives:
• Analysis of situation of the project
idea/problem/objectives and its relationship between
the market:
• Talk to customers/clients/or
people/communities who are affected by
the problem
• Competitors,
• Suppliers, and others in the project areas
139
Con’d….
• The situation analysis helps
• To develop a basis of understanding
• Tool of a choice/to minimize the risks
• To get experience of the company by means of SWOT
analysis

Strength Opportunity

Weakness Threat

140
Con’d…
• Situational analysis helps:
• To learn about the preferences and purchasing
power of customers,
• Actions and strategies of competitors, and
• Practices of the middlemen/distribution systems
• A formal study need not be carried out, If you
feel that situational analysis generates enough
data to measure the market and projected
demand, particularly when cost and time
considerations so suggest.
141
Con’d…
• Therefore, SA is helpful:
• Ensuring that the projects address the
“right” issues/
• Choice of project need to be based on solid
knowledge and analysis of broader context
• Ensuring projects are implemented with
the “right market”/market analysis
• Baseline to monitor and adapt to change in
marketing plan
142
Con’d…
• Some of basic questions in M&D analysis:

• Who are the buyers/clients/people with the

problem? Or project beneficiaries?
• What is the total current demand for the
project area?
• How is demand distributed temporally
(pattern of sales over the year) and
geographically?
143
Con’d…
• Basic questions:

• What price will the customers are willing to pay

for the product/services/research/?
• How can potential customers be convinced about
the superiority of the new product/services?
• What price will ensure its acceptance?
• What channel of distribution is more suitable for
the product/services/training?

144
Con’d…

Therefore, to answer
the above questions:
Setting objectives

Data Data
Results Decision
Collection Analysis

145
 Con’d…

Identification of target market and projection of demand

using
Primary (market survey) and secondary Data

146
Con’d…
Source of Data

147
Collection Secondary Data
Data sources
oCensus Data
oNational Sample Survey Reports
oInflation and economic report
oPlan reports
oProgress reports
oStatistical Data
oIndustry performance reports

148
Con’d…
• Evaluation of secondary sources of
information:
• Who gathered the information? What was the
objective?
• When was the information gathered? When was
it published?
• What was the target population
• How was the sample chosen
• How representative was the sample
• Was statistical analysis properly applied?
149
Con’d…
• Collection of Secondary information:

• Provides the base and the starting point for

the market and demand analysis.
• It indicates what is known and
leads to further investigation.

150
Types of Data

151
 Quantitative Secondary Data
• Most quantitative secondary data is from statistical
survey research
• Government agencies:
• Include Census, Economic Survey, Industry survey, etc.
• Academic institutions:
• Research and project reports
• Trade associations:
• Research, trade report, and etc.
• Syndicated marketing research firms:
• Quantitative data which they then sell to anyone willing to purchase.

152
Qualitative secondary data

General interest and

lifestyle
publications,

Online sources
such as
websites, blogs Business
and social publications and
networking
pages.

153
 3. Primary Sources: Conduct of Market
Survey

• Secondary information sources need to be

supplemented with primary information gathered
through a market survey.
• Market surveys are an important part of market
research that measure the feelings and preferences
of customers in a given market.

154
Con’d…
• Important to determine what products and
services to offer and how to market them.
• The market survey may be a census survey or
a sample survey

155
Con’d…
• Market Survey related to the following information:
• Total demand and rate of growth of demand
• Demand in different segments of the market
• Income and price elasticities of demand
• Motives for buying
• Purchasing plans and intentions
• Satisfaction with existing products
• Unsatisfied needs
• Attitudes toward various products
• Socio-economic characteristics of buyers

156
Con’d…
• Steps in a Market Survey
1. Determine and define the nature, extent, and size
of your market/define the target population
• Know you're target.
• Choose geographic and demographic parameters,
• Identify customers by types of product, and get an
idea of how many people
• Narrow your market research to a short list of
desired data: for example, buying habits, or average
income.

157
Con’d…
2. Find out where and when you can reach
customers in your market
 Conduct your survey at a convenient place, via
telephone, online, or through the mail.
 Choose a method and time that best suits your research.
3. Choose a sample size and sampling technique
4. Develop a questionnaire to be used for the study
5. Enter or tabulate the data from the questionnaire
6. Scrutinize, analyze and interpret information

158
 4. Characterization of the
Market
• Based on the information gathered from secondary
sources and through market survey, description about
the market, the product or service is made in terms of:

1. Effective demand in past and present

Apparent Change in
consumption = Import + Production - inventory
- Export

oIn a competitive market, effective demand and apparent

consumption are equal.

159
Con’d…
2. Breakdown of demand
o The aggregate demand may be broken
down in to demand for different segments
of the market.
oMarket segments may be defined by:
oNature of product
oConsumer groups, and
oGeographical division.

160
 Discussion
Why is segmental analysis required?

161
 Con’d…
3. Price
• Price statistics must be gathered along with
statistics pertaining to physical quantities.
• Helps to distinguish the following types of
prices:
• Manufacturer’s price quoted as FOB (free on
board) price or CIF (cost, insurance and
freight) price
• Landed price for imported goods
• Average wholesale price, and
• Average retail price. 162
Con’d…
4. Methods of distribution and Sales
Promotion:
oThe methods of distribution may vary with the
nature of product.
o For example, Capital goods, industrial raw
materials and consumer products tend to have
different distribution channels.
oMethod used for promotion (advertising,
discounts, gift schemes, etc.) may vary from
product to product.
163
Con’d…
5. Consumers
• Consumers may be characterized along two
dimensions as follows:
oDemographic and sociological:
o Age,
oSex,
oIncome,
oProfession,
oSocial background, etc.
oAttitudinal: préférences, intentions, habits,
attitudes, responses, etc.

164
Con’d…
6. Supply and competition
o Know the existing sources of supply and whether they
are foreign or domestic.
o Competition from substitutes and near-substitutes should
be specified, taking the following factors:

oPrice,
oQuality,
oAvailability,
oPromotional efforts, etc.
165
Con’d…
7. Government policy
oGovernment plans, policies, legislations,
should be considered in market analysis.
oProduction targets in national plan
oImport and export trade controls,
oImport duties,
oExport incentives,
oLicensing, and etc.

166
Demand Forecasting
1. Qualitative forecasting Method
2. Quantitative forecasting Method

167
 Con’d…
• On the basis of analysis, demand will be forecasted.
• There are a number of both qualitative and quantitative
foresting methods:
1. . Opinion Poling Method
i. Consumers survey methods- survey on future purchase
a) Complete enumeration survey : door to door survey of all
household.
b) Sample survey and test marketing: survey of selected households
c) End-use survey: forecasting future demand based on the final
demand

168
Con’d…
• Opinion Poling Method:
ii. Sales force Opinion Method : forecasting a
demand based on survey of salesman
iii. Delphi method: expert opinion Method:
forecasting the demand based on the views of
specialists.

169
Con’d…
2. Statistical or Analytical method
oStatistical methods are considered to be effective
means of demand forecasting.
oBecause
o Subjectivity is minimal
o Method of estimation is scientific
o Estimation is based on the theoretical relationship
between dependents and independents variables.
o Estimates are relatively more reliable and
o Estimation involves smaller cost. But , there are
assumptions that creates problem.

170
Con’d…
• Common statistical methods
1. Trend projection Method: using panel data
 Determining the trend of past consumption and sales
 Projecting future demand by extrapolating trends
 Used the linear relationship
𝑦𝑡 = 𝑎 + 𝑏𝑡
Yt, the demand for year “t”, t is the time
variable, 𝑎 is the interception of the
relationship, and 𝑏 is the slope of the
relationship.
171
 Con’d…
• Moving average methods:
• The forecast for the next period is equal to the
average of the sales or demand for several preceding
periods
• For example,
𝑑1 + 𝑑2 − 1 + ⋯ 𝑑𝑡 − 𝑛 − 1
𝐹𝑡 + 1 =
𝑛
• Where Ft+1, is the forecast for the next period, dt, is
the demand for the current period, n is the period
over which averaging is done.

172
Con’d…
Common trend methods of forecasting:
a) Graphical Method

173
Con’d…
b) Least Square Method: assumptions that the past rate of
change will continue in the future and used to estimate the
intercept and slope in the relationship.

𝑦𝑡 = 𝑎 + 𝑏𝑡

c) Time series Methods: past patterns in data can be used to

forecast future patterns
d) Exponential smoothing Method: one of the method of
trend projection. Providing high weights for past high
demand and forms exponential.

174
Con’d…
2. Regression Method: very common method of
forecasting demand.
3. Econometric methods: uses both statistical
analysis combined with econometric theory.
o The model uses both regression and simultaneous
equations methods of forecasting
4. Barometric method: use past demands and to
forecast future demand.
• Identifying indicators and establishing relationships

175
How to improve forecasting
1. Check assumptions: many forecasts fail
because the world changes
2. Stress fundamentals: focus on simple
questions: who are customers
• What is the size of the market
• What benefits does the proposed
product offer to consumer over the
existing products
• Are they worth the price

176
Con’d…
3. Beware of history: the trends may change
4. Watch out for euphoria: customer
preferences may change quickly
5. Stay flexible

177
 Uncertainties in Demand
Forecasting
• Reasons for errors and uncertainties in demand
forecasting
1. Data about past and present market: lack of
standardization, few observation, and influence of
abnormal
2. Methods of forecasting: inability to handle
unquantifiable, unrealistic assumptions, excessive
data requirements
3. Environmental change: Technological change,
shift in governmental policy, discovery of new
sources of raw materials,
178
6. Market Planning
• A marketing plan usually has the following
components
1. Current marketing situation:
Market situation
• The size, growth, consumer aspiration and buying
behaviors
• Pricing strategies
• What kinds of products and services do you currently
provide?
• How do you reach your customer groupings?
• Market share
• Market penetration index

179
Con’d…
i. Competitive situation
• Do you have any competition?
• Major competitors and their objectives, strategies, and strength
• Their market share, market penetration index
ii. Distribution situation
• What distribution channels are more effective
• The distribution capabilities of the competitors
iii. Macro environments
• What factor(s) in your environment has an effect on your
organization?
• Effect of social, political, economic, technological and other
external variables on the market

180
Marketing Plan
2. Opportunity and issue analysis (SWOT analysis)
• Analysis of your internal operations
• Strengths
• Weaknesses
• Also those external factors which affect your
organization
• Opportunities
• Threats

181
Marketing Plan
3. Objectives.
o Having identified the key issues affecting your
organization you can make some decisions about future
objectives.
o Guides the development of strategies and action plans.
o Objectives should meet certain criteria
• e.g. Financial and marketing which will be
customer focused.
• They should be clearly stated, measurable and listed
in order of importance
• They should be attainable and consistent with your
organization’s culture.

182
Marketing Plan
4. Marketing Strategy
• This is the game plan that needs to be implemented
to achieve the objectives.
• It addresses the following:
• Segmenting and targeting
• Positioning
• Product Line
• price
• Distribution
• Sales force
• Sales promotion

183
Marketing Plan
• Action programme
• It is the last component of market planning which
operationalize the strategy. This describes:
• What will be done?
• When will it be done?
• Who will do it?
• How much will it cost?

184
Market Plan
• Budget and controls.
• The Budget is essentially
• A cash flow statement and
• Profit/loss statement to support the marketing plan
• Control mechanisms and procedures should be
established to monitor the progress of the plan
• It would include a contingency plan in case
something adverse should happen.

185
Marketing Plan framework
4Ps 4Cs
Product Customer Value
Price Costs
Place Convenience
Promotion Communication

Product Customer Value

Price Costs
Place Convenience
Promotion Communication
186
Project Feasibility Study
Technical Feasibility Study

187
What is technical feasibility?

• Technical Feasibility is assessing the

details of how you will deliver a project
in terms of materials, labor,
transportation, where your project will
be located and implemented, with a
needed technology.

188
 Technical questions
• Are enough raw materials available with
the needed quality and quantity for year
rounded production?
• Is the correct size and type equipment
available for the project at reasonable cost?
• Is the cost of the raw materials
satisfactory?

189
Technical Questions
• Are maintenance and repair costs
affordable?
• Are distribution procedures/system to
retailers or other sellers established?
• Is a suitable building available and what
modifications are needed?
• Are trained workers available and are
their salaries affordable?
190
Considerations in Technical Analysis

• Objectives
• First, the project must fall within the ambit of
the stated mission of the sponsor(s).
• The project must be able to further the
objectives and priorities of the sponsor(s).
• Therefore, keep the organization’s objectives
along with their interest priorities

191
What are the factors determining
choice of location for a project? How
do we select optimal location by
considering these factors??

192
Technical Analysis…Con’d
• Location and site
• Locations should be identified using the
criteria of
• Material versus market orientation,
• Quality standards,
• Infrastructural status,
• Local laws, and
• Socio-economic and living conditions

193
Technical Analysis…Con’d
• Therefore, project site also identified considering the
following factors
• Terrain ,
• Local climate land its impact on plant & equipment and their
operation),
• Availability and cost of land (plus its development),
• Local infrastructural facilities and their costs (power, water,
road/ air/water transport, telecommunications, etc.),
• Socio-economic conditions,
• Availability and quality of labor and construction equipment,
• Valid waste disposal alternatives and their costs,

194
Technical Analysis…Con’d
• For example,
• Resource-oriented projects like mining of minerals
involve items like
• Geological analysis covering geological structure,
hydrological conditions, characteristics of the
resource, resource reserves, prospecting status, and
expected geological problems

195
Technical Analysis…Con’d
• For the location and site of the project also
identified based on the benefits and
incentives, subsidies offered by governments
or local bodies
• Capital loans and grants, tax, concessions,
license clearances, subsidies, infrastructure, etc.

196
 How do we select suitable
technology and equipment for
a given project??

197
Technical Analysis…Con’d
• Plant Size
• The best possible size of plant & equipment is then
recommended after analyzing the availability,
economics, and practicability of different size options
• Technology
• The latest technologies usually represent many
improvements over the existing or older ones. They
may also offer certain unique features. However,
newly emerging technologies may have some inherent
dangers as well.
198
Technical Analysis…Con’d
• Select most appropriate technology in the
prevailing situation:
• Specifications of the task/product
• Task uncertainties and interdependence
• Required gestation period versus the time actually
available of the project
• Source(s) and ease of availability
• Indigenous availability of comparable technology
• Adaptability
• Dependence on nonrenewable sources of energy

199
Technical Analysis…Con’d
• Capacity of the organization to absorb/adopt/ the
technology
• Timely availability of manpower with requisite skills
for installation, operation and maintenance
• Cost of' acquisition, installation, repairs and
maintenance versus availability of funds (local/foreign)
• Safety characteristics
• Requirement or availability of R & D facilities
• Environmental and socio cultural sensitivities
• Likelihood and time frame of obsolescence

200
Technical Analysis…Con’d
• Design, layout & plant & machinery
• The feasibility study should broadly specify the
recommended design of the processes and plant
(giving essential assumptions and design
calculations).
• It should also present a rough layout of various
facilities and list out all the major equipment's
needed, with key specifications and available
source(s) of supply.

201
Technical Analysis…Con’d
• Construction process: defined based on
parameters
• The methodology to be followed: capital Vs labour
intensive
• Whether the construction or installation is to be done in-
house Vs Contracts
• The determination of such construction equipment,
materials and other essential inputs (like cement, sand,
steel, stores etc.) along with their alternatives,
availability, source of supply (local/foreign),
infrastructural requirements (like uninterrupted supply
of power, clean water, gas, steam, etc).
202
Technical Analysis…Con’d
• The recommended sequence and time schedule of
different activities in the form of a bar-chart
network.
• Lastly, assessment of the financial implications of
this phase based on the latest available unit costs
and with provision for inflation and contingencies.

203
What are the different issues to be raised
while we are making input analysis of
projects?

204
Technical Analysis…Con’d
• Inputs: during the operation phase of the
project,
• Raw materials
• Processed materials;
• Components and sub-assemblies;
• Spares and wear and tear parts;
• Water & steam,
• Gas, fuels and electricity.
• Next, their qualitative and quantitative
requirements such as availability, feasibility
alternatives and reliable sources of supply
should be carefully ascertained and record.
205
Technical Analysis…Con’d
• Infrastructural facilities:
• Availability and characteristics of roads,
bridges, railway facilities (like station, yards),
air transportation, waterways, ports, etc.
• Depending upon their relevance to the
assessed requirements of the project at both
implementation and operation stages need to
be studied.

206
 Explain the environmental impact
assessment of projects & its objectives?

Identify the possible environmental costs

and benefits of a project
207
Technical Analysis…Con’d
• Environment impact assessment (EIA);
• The feasibility study identifies the environment in
which a project is to be implemented, assesses the
short and long-term environmental impacts as result
of the project activities during construction as well
as operation phases and generates preferred
alternative courses of action, if possible.

208
Technical Analysis…Con’d
• For instance, for rail • Forests;
/road/ highway project • Terrestrial wildlife;
the following
parameters have been • Noise;
identified: • Industries;
• surface water quality; • Archaeological/historic
• Air quality; al significance;
• Erosion ; • public health; and
socio-economic factors
• Land quality;
• Fisheries;

209
Article Review -2

210
 Reading Assignment
o Human Resource Feasibility Study
o Institutional Feasibility Study
o Socio-cultural Feasibility Study
o Environmental Feasibility Study

211
Chapter 4: Financial Analysis
and Project Financing
Cost of project

Means of finance (project financing)

Estimation of sales and production

Project Costs

Cash flows in financial analysis

212
4.1 Introduction
• Result from a feasibility study is a good tool that
helps the project promoter to take a decision on the
investment proposal.
• Therefore, investment and project cost should be
well studied and determined.
• Because the overall project profit determined by
the size and structure of investment and production
cost.
• Therefore, critical financial analysis is required for
studying the viability of the project.

213
Financial Analysis
• Financial analysis seeks to ascertain whether the
proposed project will be financially viable in the
sense of satisfying the expected rate of return for
those who invest.
• It also critical to determine the financial profitability
of a project to the project implementer.

214
 Appraisal Exercising

Common appraisal exercising

• Can we produce the goods or services?
• Can we sell the goods or services?
• Can we earn a satisfactory return on
the investment made in the project?

215
Con’d…
• The appraisal exercising culminates in
developing projection for three financial
statements:

1. Profit and Loss Statement

2. Cash Flow Statement
3. Balance Sheet

216
Identification and Quantification of Costs
and Benefits

• Identification of costs and benefits is the first step in

project financial analysis.
• The costs and benefits of a project depend on the
objectives that the project wants to achieve.

217
Con’d…
• A cost is anything that reduces an
objective,
• Costs are the expenditures, e.g.,
• Capital costs,
• The cost of purchasing land,
• Equipment,
• Factory buildings,
• Vehicles, and office machines,
• Working capital as well as its ongoing
operating costs.
218
Con’d…

• A benefit is anything that contributes to

an objective.
• The financial benefits of a project are the
revenues received
• Sales

219
 Quantification of costs and
benefits
• Accurate prediction of the future benefits and costs
which then should be quantified
• Quantification involves the quantitative assessment
of both physical quantities and prices over the life
span of the project.
• The financial analysis of projects is typically based
on accurate prediction of market prices, and other
factors affects the price.

220
Cost of Project
• Conceptually, the cost of project represents the total
of all items of expenditure associated with the
project which are supported by long-term fund.
• Expenditures such as
• Land and site development
• Buildings and civil works
• Plant and machinery
• Technical knowhow and engineering fees
• Miscellaneous fixed assets
• Initial cash losses
• Pre-operating expenses and etc.
221
Means of Financing

Share Capital/sell of stock

Term Loans/bond capital

Debenture Capital

Deferred Credits

Incentive Sources

Miscellaneous sources
222
Con’d…
• Effective project financing need to see
the debt-to-equity ratio
• The relation between amounts borrowed
and amounts invested to the business by
the owners.
• The more money owners have invested in
their business, the easier it is to attract
financing.

223
Project Financing
• Project financing is the allocation of financial
resources to a project.

Project Financing

Debt financing Equity financing

224
Con’d…

Debt
Financing

Corporate Public
Borrowing Trade debt
debt or bond deposits

225
 Con’d…
• Shared Capital
• There are two types of share capital
1. Equity Capital: represents the
contribution made by the owners of the
business and the equity shareholders.
2. Preference Capital: represents the contribution
made by preference shareholders and the
dividend paid on it is generally fixed.
226
Con’d…

• Term Loans
• Represents a secured borrowings which are
a very important sources provided by
financial institutions.
• It is a major sources of financing new
projects
• Financing for expansion and
modernization, and renovation schemes for
existing firm.
227
Con’d…
• Debenture Capital:
• Debentures are instruments for raising debt
capital
• Non-convertible debentures and Convertible
debentures
• Non-convertible debentures are straight
debt instruments. This carry a fixed rate
of interest and have maturity period of 5
to 9 years.
• Convertible debentures: convertible
wholly or partly, into equity shares. 228
Con’d…
• Deferred Credit
• Suppliers of the plant and machinery offer
a deferred credit facility under which
payments for the purchase of the plant and
machinery can be made over a period of
time.
• Purchase of plant and machinery on
credit/account, the payment is due in long-
term.
229
Con’d…
• Incentives Sources:
• The government and its agencies may
provide financial support.
• The incentives may in the form of
• Seed capital/seed money assistance: provided at a
low/nominal rate of interest to initiate a project.
• Capital subsidy: The subsidy provides to attract the
industries, e.g., tax deferment or exemption
(particularly from sales tax) for a certain period.

230
Con’d…
• Miscellaneous sources such as:
• Unsecured loans: provided by the promotors to
bridge the gap between the promoters’
contribution as required by the financial
institution and the equity capital.
• Public (employees, customers, shareholders,
and the general public) deposits:
• borrowings from the public at large
• involves high rate and high risk.
• Form of short-term financing
• Often unsecured
231
 Con’d…
- Ranges from 6
months to 3 years
Short-term
sources of
Interest rate varies finance
based on the
company’s
reputation and the
period for which Interest Submission
Rate of form
the deposit is made
Public
- Depositors receive deposit
higher interest
- The cost of deposits to
the company is less in
comparison to the cost - The amount of loan
Mutual Issue of
of borrowing from benefit receipt - Interest rate
Bank - And date of payment
- But not secured by any
collateral 232
Con’d…
• Leasing and hire purchase finance
• Form of borrowing but different from the conventional
term loans and debenture capital.
• Common medium-and long-term financing
• Providing only use-right with periodical payment (lease
rental
• Provide options of buying or returning the asset
oHire purchase finance (HPF):
o Paying installments covering depreciation and interest to
cover capital cost
o The ownership is transferred, if outstanding installments
payed.

233
 Miscellan
Share Debenture Incentives Term Deferred eous
Capital Capital sources loans Credits sources

Sources of Financing

Labor

Land,
Building
Plant and
Project Output/
Machinery Cost
Financing deliverables
Initial cash
losses
Benefits
Pre-operating
expenses
234
Planning the Means of Finance

• How should you go about

determining the specific means of
finance for your project?

235
 Points to be considered in
selecting sources of finance
These area:
1. Norms of regulatory bodies and
financial institution
2. Key business consideration
o Cost
o Risk
o Control
o Flexibility

236
Con’d…
1. Norms of regulatory bodies and
financial institution
• Means of finance for a project must either
be approved by:
• Regulatory agency or
• Conform to certain norms laid down by the
financial institution
• The primary purpose is:
• To impart prudence to project financing decision
• Provide measure of protection to investors
• Provide substantial assistance to projects
237
Con’d…
2. Key Business Consideration
o Cost
o Risk
o Control
o Flexibility

238
Con’d…
• Cost
• For example, cost of capital, e.g., interest
rate
• e.g., debt funds is lower than the cost of equity
funds.
• Because, the interest payable on debt
capital is a tax deductible expenses
whereas the dividend payable on equity
capital is not tax deductible.
• Cost of public deposit is lower than cost of
borrowing from Bank

239
Con’d…
• Risk: There are two major risks
1. Business risk: refers to the variability
of earnings before interest and tax due
to mainly from fluctuations in demand
and variability of prices and costs.
2. Financial risk: the risk arising from
financial leverage- inability to serve the
source of capital.
 Debt capital is cheaper sources of finance,
but riskier sources of finance due to the
fixed financial burden.
240
Con’d…

• Control:
• Promoters prefer a scheme of financing which
enables them to maximize their control
• Flexibility:
• The ability of a firm (or project) to raise further
capital from any sources to meet largely unforeseen
future needs.

241
Con’d…
• Therefore, by understanding the
monetary policy (norms of regulatory
bodies),
• sources of capital with moderate cost and
risk should be determined that enables the
firm to maximize the control and allows
flexibility in raising additional capital.

242
 Estimates of sales and production
• In estimating sales revenue, the following
considerations should be born in mind:
1. It is not advisable to assume a high capacity
utilization level in the first years of operation,
rather rise gradually to reach the maximum level
in the 3rd or 4th year of operation.
2. A reasonable utilization assumption is
 40 –50 percent of the installed capacity in the 1st year
 50 –80 percent in the 2nd year, and
 80 –90 percent from the 3rd year

243
Con’d...
3. In practical, it may be assumed that production would
be equal to sales
4. The selling price considered should be the price
realizable by the company.
5. Assumed that changes in selling price will be
matched by proportionate changes in cost of
production.

244
 Cost of Production
• The major component of cost of production are:
1. Material cost (raw materials, chemicals, components,
and consumables required for production). It is the most
important cost.
It is the function of quantity and price payable for the
materials.
oConsideration for estimating the material costs
oThe requirements of various material input per unit of
output based on:
o Theoretical consumption norms
o Experience of the industry
o Performance
o Specification of machinery suppliers
245
 Con’d...
 Consideration in estimating costs:
oThe total requirement of various material inputs can
be obtained by multiplying the requirements per unit
of output with the expected output during the year
oThe prices of material inputs are defined in CIF
(cost, insurance, and freight)
oThe present costs of various material inputs is
considered.
oIf seasonal fluctuations in prices are regular, the
same must be considered in estimating the cost of
material inputs.
246
Con’d…
Production Costs…
2. Labor cost: all the costs of
manpower employed in the project.
o it is the function of number of manpower and
the rate of remuneration.
o The remuneration includes
oBesides basic pay (salary), allowances,
bonus, and provident fund contribution.
oShould consider vacations, overtime work,
night work, work on holidays, etc.
247
Con’d…
3. Utilities Cost (e.g., power, water, and
fuel)
4. Factory overhead cost (e.g., repairs and
maintenance, rent, taxes, insurance on
factory assets, etc.)

248
Working Capital Requirements
and Its Financing
• The working capital requirements
consists:
• Raw materials and components
• Stocks of goods-in-process
• Stocks of finished goods
• Debtors
• Operating expenses
• Consumable stores
249
 Con’d…
• Working capital:
• Commonly defined in financial analysis as net current assets.
• Consisting of inventories, including goods in process; net
receivables; marketable securities; bank balances; and cash in
hand.
• A certain amount of working capital is normally required to
run project facilities created by investment in fixed assets.
• Sources of working capital finance are:
• Working capital advances provided by commercial banks,
• Trade credit,
• Accruals and provisions; and
• Long term sources of financing.

250
Profitability of Projects
• Given the estimates of sales revenue and cost of
production, the next step is to prepare the
profitability projections.
• The estimates of profitability may be prepared.

251
 Con’d…
Category Calculation Amount
A. Cost of Production xx
B. Total administrative expenses xx
C. Total sales expenses xx
D. Royalty and Know-how payable xx
E. Total cost of production A+B+C+D xxx
F. Expected sales xx
G. Gross profit before interest xx
H. Total Financial expenses, e.g., xx
interest
I. Depreciation xx
J. Operating profit G-H-I xxx
K. Other Income xx
L. Preliminary expenses written off xx
M. Profit/Loss before taxation (J+K)-L xxx
N. Provision for taxation xx
O. Profit after tax M-N xxx
Less Dividend On xx
- Preference capital
- Equity Capital
P. Retained profit O-Dividends xxx
Q. Net cash accrual P+I+L xxx

252
Breakeven Points
• In addition to determining the level of profitability,
it is helpful to know what the level of operation
should be to avoid losses.
• For this purpose, the break –even point, which
refers to the level of operations at which the project
neither makes profit nor incurs loss is calculated.
BEP= Fixed Costs
S.P per unit-VC per unit

253
Projected Cash Flow Statements

• The cash flow statement shows the movement of

cash into and out of the firm and its net impact on
the cash balance with the firm.
• The cash flow statement is really a cash flow
budget.
• The three basic steps in determining whether a
project is worthwhile or not are:
a) Estimate projected cash flows,
b) Establish the cost of capital, and
c) Apply a suitable decision or appraisal criterion

254
 Measuring Relevant Cash Flows

• It is important to measure the actual flows of

income and expenditure to calculate the financial
or economic rate of return,
• Costs are typically broken into investment and
operating costs.
• Investment costs
• Capital expenditure such as plant and machinery

255
Cash Flow…Con’d
• Operating Costs
• Expenditure once the project is
underway
• Includes:
• Variable: raw materials and labor inputs
varies with output
• fixed costs: maintenance, administration
and managerial charges which will be
relatively fixed with respect to volume of
production. 256
 Basic Principles for Measuring
Project Cash Flow
• Incremental principle

Project cash flow for year “t” =

𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑓𝑖𝑟𝑚 𝑤𝑖𝑡ℎ 𝑡ℎ𝑒 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟t −
𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑓𝑖𝑟𝑚 𝑤𝑖𝑡ℎ𝑜𝑢𝑡 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 "𝑡"

257
Con’d
• Long term funds principle

• Project be evaluated from the point of view of

the long-term funds because the principle of
evaluation is long-term profitability.
• Determining the costs and benefits
of long term investment?

258
 Con’d…
• Exclusion of financing costs principle

• The interest on long term debt is ignored while

computing profits and taxes thereon
• The expected dividends are deemed irrelevant in cash
flow analysis.
• If interest on long term debt and dividend on equity
capital are deducted in defining cash flows, the cost of
long term funds will be counted twice, which is an error.

259
Con’d
• Post -tax principle
• Tax payments like other payments must be
properly deducted in deriving the cash flows.
Put differently cash flows must be defined in
post tax terms

260
 Components of the Cash Flow Stream

1. An initial investment
oRepresents the relevant cash flow when
the project is set up
2. Operating cash inflows and outflows
o The operating cash flows are the cash flows that arise
from the operation of the project during its economic
life.

3. A terminal cash flow

o The terminal cash flow is the relevant cash flow
occurring at the end of the project life on account of
liquidation of the project 261
Con’d…
• Investment Cost:
1. The cost of land and site development
• Land charges
• Payment for lease
• Cost of leveling and development
• Cost of laying approach roads and internal
roads
• Cost of gates
• Cost of tubes wells

262
Con’d…
2. The cost of buildings and civil works. E.g.,
• Buildings for the main plant and
equipment
• Buildings for auxiliary services (steam
supply, workshops, laboratory, water
supply, etc.)
• Warehouses and show rooms
• Non factory buildings like guest house,
canteens, residential quarters, staff rooms
• Silos, tanks, wells, basins, etc.
• Garages and workshops
• Other civil engineering works
263
Con’d…
3. Plant and machinery, e.g.,
• Cost of imported machinery which might
include the FOB value, shipping freight
and insurance costs, import duty, clearing,
loading, unloading, and transportation
costs
• Cost of local or indigenous machinery
• Cost of stores and spares
• Foundation and installation charges
264
 Con’d…
4. Technical knowhow and engineering fees, e.g.,
• Consultants (local or external)
5. Miscellaneous fixed assets
• Expenses related to fixed assets such as:
• Furniture
• Office machines
• Tools
• Equipment
• Vehicles
• Laboratory equipment,
• workshop equipment
265
Con’d…

6. Net working capital

• Represents the liquid assets which will be
tied up in the project.
• Computed as current assets less
current liabilities in operating the
project during the planning horizon.

266
Con’d…
7. Pre-operative expenses
• Establishment expenses,
• Rents, taxes, and rates
• Traveling expenses interest and
commitment charges on borrowings
• Insurance charges
• Mortgage expenses interest on differed
payments,
• Miscellaneous expenses

267
Con’d…
Operating Cash Flows;
a) Cash outflows:
a) The cost of production, e.g.,
 Material
 Utilities
 Labor
 Factory overheads
 Other costs: administrative costs, sales cost
including marketing costs
268
Con’d…
b) Cash inflows
• Sales of the products or services

269
 Chapter-5
Financial Appraisal
Techniques

270
Introduction
• The key steps in determining whether the
project is profitable or not:

• Estimate project costs and benefits

• Assess the riskiness of the projects/financial mix)
• Calculate the cost of capital
• Compute the criteria of merit and judge whether
the project is financially worthy or not.

271
Con’d..
• A wide range of criteria can be applied to judge the
worthwhileness of investment projects.
• They fall into two broad categories.

Investment
criteria

Discounting criteria Non-discounting criteria

- Net present value - Inspection
- Benefit cost ratio - Payback period
- Internal rate of return - Accounting rate of return

272
Con’d…
1. Non-Discounted Methods:
a) Ranking by Inspection
o Identify the profitable projects by mere inspection
- Initial capital investment
- Cash flow in the first year and subsequent years , then the
investment with longer life would be more desirable.
- For, example, Project B is more desirable
Investment Initial project Net Cash proceeds per Year
project Cost
Year 1 Year 2
A $10, 000 $15, 000 ---
B $10, 000 $,15, 000 $5, 000
273
 Con’d…
• Project C & D have the same initial outlay, the same
earning life, and earn the same total profits, but project D
has more of the flow earlier in the time sequence than
Project C, therefore, Project D is more desirable.

Investment Initial Net Cash proceeds per Year

project project Cost
Year 1 Year 2
C $10, 000 $10, 000 $15, 000
D $10, 000 $,15, 000 $10, 000

274
 Con’d…
2. The payback/payoff period:
o Commonly used in enterprises.
o The length of time required to cover the initial cash outlay on
the project.
o For example, if a project involves a cash outlay of $600, 000 and
generates cash inflows of $100, 000, $150, 000, $150, 000, $ 200, 000
in the 1st, 2nd, 3rd and 4th years, respectively, its payback period is 4
years.
o The sum of cash inflows during 4 years is equal to the initial
outlay. However, if the annual cash inflow is a constant sum,
the payback period is simply the initial outlay divided by the
annual cash inflow.
o For example, a project which has an initial cash outlay of $800, 000
and a constant annual cash inflow of $200, 000 has a payback period of
$800, 000/$200, 0000= 4 years.
275
Con’d…
• According to the payback criterion, the shorter the
payback period, the more desirable the project.
• If the firm specify the maximum acceptable
payback period (n years),
• Therefore, projects with a payback period of n years
or less are deemed worthwhile and projects with a
payback period exceeding n years are unworthy.

276
 Con’d…
• Advantages of the method:
• It is simple, both in concept and application.
• It is a rough and ready method for dealing with
risks: generates substantial cash inflows in earlier
years and helpful in weeding out risky projects in
the future.
• It may be a sensible criterion when the firm is
pressed with problems of liquidity.

277
Con’d…
• Limitations of the method:
• It fails to consider the time value of money. Cash inflows,
in the payback calculation, are simply added without
money devaluation or appreciation.
• It is a measure of project’s capital recovery, not
profitability.
• It fails to take into account differences in the timing of
receipts and earned proceeds prior to the payback period.
• It ignores cash flows beyond the payback period. This
Leads to discrimination against projects which generate
substantial cash flows in later years.
278
Con’d…
• For example: based on the payback period
criterion, Project A is worthy because has a
payback period of 3 years but project B is
unworthy because has a payback period of 4 years.
• Even though project B has very substantial cash
inflows in years 5 and 6.
Year Cash flow of A Cash Flow of B
0 $(100, 000) $(100, 000)
1 50, 000 20, 000
2 30, 000 20, 000
3 20, 000 20, 000
4 10, 000 40, 0000
5 10, 000 50, 000
6 --- 60, 000 279
Con’d…
• Proceeds per unit of outlay:
• Projects are ranked according to their total
proceeds divided by the amount of the
corresponding investments.
Projects Total proceeds Investment Proceeds per Ranking
outlay unit of outlay
A $10, 000 $10,000 $1.00 4
B $11, 100 $10, 000 $1.11 3
C $11, 645 $10, 000 $1.14 1
D $11, 524 $10, 000 $1.15 2

280
Con’d…
3. Accounting Rate of Return:
• It is also referred to as the average rate of return on
investment.
• A measure of profitability which relates income to
investment.
• It also shows the effect of an investment on
project’s financial statement.
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝐴𝑅𝑅 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡

281
Con’d…
• For example, assume the company purchase
buildings whose investment cost is $607, 500 useful
life is 4 years, and expected annual cash inflow
from operation is $200, 000.
• First the annual depreciation would be:

𝑂𝑟𝑖𝑔𝑖𝑜𝑛𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝐷=
𝑈𝑠𝑒𝑓𝑢𝑙𝑖𝑓𝑒
= $ 607, 500/4= $151, 875

282
Con’d…
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝐴𝑅𝑅 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡

=
($200, 000-151, 875)/$607, 500 , therefore,
ARR = 7.92%, obviously, the higher the ARR, the
better the project. Usually, 15%-30% accepted cut off
rate of return.

283
Con’d…
• Advantage of Accounting Rate of Return:
• It is simple to calculate
• It is based on accounting information which
is readily available and familiar to
businessmen.
• It considers benefits over the entire life of the
project.
• It facilitates auditing of capital expenditures.
284
Con’d…
• Shortcomings of the Accounting rate of return

• It is based upon accounting profit, not

cash flow
• It does not take into account the time value
of money, i.e., expected future dollars are
erroneously regarded as equal to present
dollars.

285
Con’d…
2. Discounted Methods:
oThe undiscounted measures discussed so far share a
common weakness.
oThey fail to take into account adequately the timing of
benefits.
• One may expect inflation to reduce the real value of
money in a year’s time.
• It would still be preferable to take the money today and
invest it at some rate of interest, r. hence receiving a total
of Money (1+r) at the end of the year.
• The money today would still be preferable on the
grounds that there is a finite risk of not being around to
collect the money next year.

286
 Con’d…
1. Net Present Value(NPV):

o The NPV of a project is the sum of the present values

of all the cash flows(both outflows and inflows) that
are expected to occur over the life of the project.
oThe NPV is defined as the difference between the
present value of benefits and the present values of
costs.
oThe NPV can be obtained by discounting separately
for each year, the difference of all cash outflows and
inflows accruing throughout the life of project at a
fixed, pre determined interest rate.
287
 Con’d…
• The general formula of NPV is:
𝑛
(𝐵𝑡 − 𝐶𝑡)
𝑁𝑃𝑉 =
(1 + 𝑟)𝑡
𝑡=0
Where:
 Bt are the project benefits in period t
 Ct are the project costs in period t
 r is the appropriate discount rate
 n is the number of years for which the project will operate

288
 Con’d…
Example:
Year Cash Discount Discounted cash Discounted Discounted cash
flow factors for 10% flow(10%) factors for 20% flow(20%

0 -20 1.00 -20.0 1.00 -20.00

1 4 0.909 3.64 0.833 3.33
2 4 0.826 3.30 0.694 2.78
3 4 0.751 300 0.579 2.32
4 4 0.683 2.73 0.482 1.93
5 4 0.621 2.48 0.402 1.61
6 4 0.564 2.26 0.335 1.34
7 4 0.513 2.05 0.279 1.12
8 4 0.467 1.87 0.233 0.93
9 4 0.424 1.70 0.194 0.78
10 4 0.386 1.54 0.162 0.65
NPV 4.54 million -3.21 million289
Con’d…
• The values stated under “discount factors for 10%
and 20% can be obtained from any standard set of
discount tables.
• Since discounting the cash flow at 10% produces a
positive NPV of 4.57 million Birr we conclude that
the project should be undertaken.
• Suppose now that cost of capital were to be raised
to 20% the project produces a negative NPV of
3.21million Birr. In this event the project would
have to be rejected.
290
 Con’d…
• The decision rule:
1. Accept the project, if the NPV is positive (Bt>Ct)
2. Reject the project, if the NPV is negative (Bt<Ct)
3. Indifference, if NPV=0 and,
 If several project alternatives, the project with the
largest NPV is worthy. In this case,
o Need to know how much investment would be required to
generate these NPVs, if there are alternative projects.
Therefore;
o The ratio of the NPV and the present value of investment
(PVI);
𝑁𝑃𝑉
NPVR=
𝑃𝑉𝐼 291
Con’d…
• Limitations of the NPV:

• The NPV selection criteria is that it is simple to

use, the criteria has the following limitations.

• There may be problem in selection of

discount rate.
• It does not consider the life of the project.

292
Con’d…
2. The Benefit-cost ratio (Profitability Index)

• Defined as the present value of benefits (cash

inflows) divided by the present value of costs (cash
outflows).

BCR

293
Con’d…
• Profitability Index(PI)
𝐃𝐢𝐬𝐜𝐨𝐮𝐧𝐭𝐞𝐝 𝐜𝐚𝐬𝐡 𝐢𝐧𝐟𝐥𝐨𝐰𝐬
PI=
𝐃𝐢𝐬𝐜𝐨𝐮𝐧𝐭𝐞𝐝 𝐜𝐚𝐬𝐡 𝐨𝐮𝐭𝐟𝐥𝐨𝐰𝐬
Therefore, If BCR >1, the project will accept
but reject if BCR <1 or BCR=0, indifferent

294
 Con’d…
3. The internal rate of return of a project (IRR):
• This is a second measure of profitability.
• It is also called yield method.
• The method utilizes present value concept but
seek to avoid the arbitrary choice of a discount
rate.
• Hence an attempt is to find the discount rate which
just make the NPV of the cash flow equal to zero.
• Therefore, IRR is a level of interest rate that could
result in NPV of zero.
295
Con’d…
• IRR is:
• The rate of discount, which makes the present
value of the benefits (PVBs) exactly equal to
the present value of the costs (PVCs).
𝑛
(𝐵𝑡 − 𝐶𝑡)
𝑁𝑃𝑉 = 0 =
(1 + 𝑅)𝑡
𝑡=0

Therefore, R is the IRR which is the rate of return earned on the initial investment made
in the project.

296
Con’d…
• While calculating the NPV, the pre-determined
discount rate and a table used but the calculation of
the IRR amount is searching for the discount rate
that gives a zero NPV.

• This is achieved through trial and error using

the standard discounting table.
• This rate if determined will represent the exact
profitability of the project.

297
Con’d..
• Steps in the calculation of IRR:

• Preparation of a cash flow Table.

• Estimated discount rate using a discounted Table
• Calculate the discounted net cash flow to the present
value.
• If the NPV is positive a higher rate is applied. If it is
negative at this higher rate the IRR must be between
those two rates.

298
Con’d…
Example:
Year
1. Costs 1 2 3 4 5 6 7 8 9 10 11
Land 1000
Site 200 600 400
preparation
Equipment 190 200
Labor 120 120 120
Total Cost 1510 920 520 0 0 0 0 0 0 0 0
2. Benefits 0 0 0 690 690 690 690
Net benefits -1510 -920 -520 690 690 690 690
Discount NPV in million
Rate:
5 1130.6
10 241.9
15 -314.7
12 -12.0
At IRR = 0.00
299
11.8965
Con’d…
• If the positive and negative NPVs are close to zero, a
precise and less time consuming way to arrive at the
IRR uses the following formula:
𝑃𝑉(𝐼2−𝐼1)
IRR= I1+
𝑃𝑉+𝑁𝑉
Where: I1=the lower discount rate
I2= the upper discount rate
PV= NPV(positive) at the low discount rate of I1
NV= NPV(negative) at the high discount rate of I2
But I1 and I2 should not differ by more than 1 or 2 %.
300
Con’d…
• For example:
𝑃𝑉(𝐼2−𝐼1)
IRR= I1+
𝑃𝑉+𝑁𝑉
241.9(12−10)
= 10+ ,,,, ignore the (-) sign.
241.9+12.0
= 11.90, check the previous example in the
Table.

301
Con’d…
• Decision rule for independent projects:
1. If IRR is greater or equal to the pre-determined
discount rate (opportunity cost of capital, r),
accept all the independent projects,
2. NPV>0 then R>r
3. NPV=0 then R=r
4. NPV<0 then R<r, reject the independent project.

302
Con’d…
• The IRR and Mutually Exclusive Project

• Subtracting the cash flow of the smaller project

from the cash flow of the larger one.
• Calculating the IRR of the residual cash flow.
• Then IRR > r (target discount rate) then the
larger project with a higher NPV will be
accepted.

303
Individual Assignment
1. What are the advantages and
limitations of using IRR and Benefit
Cost Ratio criterion.

304
Financial Analysis under Conditions of
Risk and Uncertainty
• The calculation of NPV, IRR and other project appraisal
tools is based on a number of variables that the project
analyst perceives them at a time of conducting
feasibility study.
• But any of all these variables are subjected to change as
a market and economic conditions change.
• Therefore, the financial analysis takes into account the
range of possible variation through:
• Sensitivity analysis,
• Scenario analysis
• Probability analysis.

305
Con’d…
• Sensitivity analysis
• Search the impact of changes in critical
variables on the profitability of an enterprise or
its cash flows.
• Used to measure the degree of variation that can
be tolerated by the project.
• The key variables to which sensitivity analysis
could be applied may differ from project to
project depending on the nature of the project.

306
Con’d…
• However, most projects are sensitive to the
following five principal elements:
• Price of inputs
• Price of output
• Volume of output
• Cost of investment (capital)
• Operating cost

307
Con’d…
• Sensitivity analysis uses NPV.
• Steps in sensitivity analysis:
• Measure the project worth using
original estimate.
• Measure the project worth using new
estimate.
• Determine how likely that change to
occur

308
 Con’d…
• For Example:
• Consider a project is proposed for establishing a tire
producing plant with initial investment of Birr
10,000,000.00. The operating life of the project is 10
years. Assume a discount rate of 10%, the NPV is
calculated to be Birr 10,875,000. Then a sensitivity
analysis for 25% cost overrun, the new NPV at 10%
discount rate to be Birr 4,298,000 .
• As a result, if 25% cost overrun was assumed the net
present worth, given a 10% opportunity cost of capital,
fell by 62.9% from Birr 10,875,000 to Birr 4,298,000
309
 Cond’…
• Scenario Analysis:
• If variables are inter-related, scenarios analysis is
helpful, each scenario representing a consistent
combination of variables.
• For example, a project may be evaluated under three
different scenarios:
• The base case scenario where the demand and price are
expected to be normal.
• The scenario where the demand is high, the price high.
• The scenario where the demand is low, the price low

310
Con’d…
• Firms often do a different kind of scenario analysis
in which the following scenarios are considered:

• Optimistic scenario: High demand, high selling price,

low variable cost, and so on.
• Normal scenario: Average demand, average selling
price, average variable cost, and so on.
• Pessimistic scenario Low demand, low selling price,
high variable cost, and so on.

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Article Review-3

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 End
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